In this world of constant news flow, and rapid access to financial data, it's easy to forget the difference between investing and trading. Many amateurs (and most professionals for that matter) seem to confuse the two concepts, engaging in a strange hybrid of the two philosophies.

“Trading and investing are based on two very different philosophies. Investors purchase and sell when a stock deviates from its intrinsic value. Traders, on the other hand, take their cues from price action…Problems arise when people integrate trading concepts in an investment approach” Frederik Vanhaverbeke, Excess Returns

The problem is that investors often get lured in by the siren-sound of the trading world. There is good reason for this – our brains are wired to look for patterns and make predictions. Succumbing to a trading mentality can give our brains the dopamine hit it craves. And once we get a taste of that excitement, it's hard to give up. We forget that profitable investment should be boring

Bad “trading habits” sit at the intersection of these three dangerous psychological biases:

Pattern Seeking

Pattern Seeking is a powerful bias because it evolved as a survival instinct. Being alert to anything out of the ordinary was crucial for early man. Whether it was identifying a threatening animal in the long grass, or a potential meal on the horizon. A false positive wasn't a big deal – after all there is no downside to finding out that you only imagined that lion (except a little embarrassment among your fellow hunters). So we're wired to be over-sensitive – to piece together small fragments of information and to create a pattern out of nothing.

In financial markets, you'll find people looking for patterns and trends in everything. A whole language has grown up around this habit of pattern-seeking. If you find yourself thinking about Closing Ranges, Coppock Curves or Bullish Homing Pigeons, my advice to you is to stop right there. Most likely you've been sold on something that is designed to appeal to your natural pattern-seeking instinct. In my experience, it rarely helps you to be a better investor.